ACC: Identifying The FAS 5 Threat - And Promptly Responding

Wednesday, October 1, 2008 - 00:00

The Editor interviews Carol Ann Petren, Executive Vice President and General Counsel, CIGNA Corporation, and member, Board of Directors of the Association of Corporate Counsel (ACC) and, member, ACC's Board Advisory Committee, which directs the development of ACC's public policy positions.

Editor: How did the FAS 5 issue first come to your attention as a Board Member of ACC?

Petren: Those of us in public companies pay close attention to the FAS 5 requirements and disclosure issues in general, but when this proposal was presented in June, ACC served an important role in heralding how proposed changes to this rule could have a significant and negative impact on our companies and substantially change disclosure requirements that already present serious challenges for us. ACC was out in front of the majority of law firms and other bars with its alerts to the membership, and one in particular: "Top Ten Reasons Corporate Counsel Should be on Alert to FASB's Proposals to Amend FAS 5 - Accounting for Contingencies," [http://www.acc.com/ resource/v9889]. Members began calling and emailing in their concerns, and the Advocacy Committee of ACC's Board, and then the full Board itself, discussed the issue at our June 2008 board meeting in Minneapolis, and agreed that this issue should receive top attention. I commend ACC's Board Chairman, Laura Stein, for her focus and leadership on this issue from the start.

Also, ACC is very active in protecting the attorney-client privilege in the corporate setting and is leading the charge against privilege erosion in a variety of contexts. So it was natural for ACC to drive the opposition to a proposal that combines disclosure challenges with a deleterious impact on privilege protection that faces public companies represented by ACC's membership of 25,000 in-house counsel.

Editor: How did ACC coordinate its strategy and did they rely on outside expertise?

Petren: ACC was assisted in drafting its comments by two thought leaders who volunteered their time. We are extremely grateful to Daniel Fischel, a professor of law and business at Northwestern University Law School and the Kellogg School of Management and the former dean of the University of Chicago Law School, and John Villa, a partner at Williams & Connolly, who is also an adjunct professor of law at Georgetown University Law School. We are fortunate to have John's counsel on many of our amicus briefs as well as a contributor to a column in the ACC Docket on ethics and privilege issues. John is also the author of our co-published treatise (with West), "Corporate Counsel Guidelines," offering practice and ethics guidance for in-house counsel.

Of course, we have an outstanding staff and leadership that drive the development of our positions and our member alerts. ACC brings tremendous value through effective advocacy that is directed and substantially guided by a distinctly in-house focus and perspective. Indeed, prior to writing and submitting these comments, ACC sought the guidance and feedback from a much larger pool of experience and leadership - the ACC board and membership generally. One of the really unique aspects of ACC is that it is member-driven and our advocacy functions are organized to assure that our agenda is defined by the members. Given the potentially diverse interests of our members and our limited resources, it is important that we "take the temperature" of the larger membership in arriving at our priorities across the organization. It would be an understatement to say that the temperature of almost all of our members on the FASB issue was "very hot." Even CLOs from private companies, who are not formally regulated by these rules, or CLOs for non-US companies that do business in the US, supported our strong opposition to the FASB proposal.

Editor: How was ACC able to gather such a large and impressive list of general counsel to endorse the views expressed in the ACC submission?

Petren: The proposed amendments generated one of the largest and most unified responses from the ACC membership within our history, so with a good draft of comments in hand, and the natural affinity that so many of our members have for the work of our association, an unprecedented number of leaders responded to a simple email requesting that they contact us with their interest.

The strong and widespread opposition to the proposed amendments expressed by our members was very effectively coordinated by ACC. As you can imagine, it was a logistics nightmare to coordinate comments from more than 100 leaders involved in the process to include signers and co-filers in other organizations. Through electronic communications, ACC was able to engage members constructively, conveniently and quickly. That so many signed on is also a tribute to our internal networks that include our chapters, our CLO network, and our committee leadership. Frankly, had the comment period not been so brief, I believe we would have had an even greater number of member-signatories. In fact, we filed another copy of the July 25 comments on August 8 with supplemental signatures.

It should be abundantly clear that ACC's letter is not an academic exercise, but rather captures the voice and concern of corporate lawyers for every kind of company in the marketplace. If we are invited to participate in the regional testimony before the FASB, which is the next step in the process, we hope to be able to count on the unique ability of this membership to communicate how the proposals will create real problems for the corporations and shareholders it represents.

Editor: What are the most significant concerns raised by ACC members in response to FASB's proposal? Petren: Let me first say that we support efforts to improve the transparency, accuracy and consistency of financial disclosures. No one is trying to shield companies from the appropriate scrutiny of the marketplace. Frankly, our interest in facilitating good disclosure is exactly why we are so opposed to these changes. Rather than enhancing transparency, accuracy and consistency, these proposed rules will make it more difficult for the investing public to get an accurate picture of a company's financial standing and potential liabilities, and will discourage clients from seeking robust in-house counsel assessments that are needed for prudent fiscal leadership.

The FASB proposal will mandate extensive and detailed new disclosures on an overly broad range of cases at varying stages of the litigation process, including much earlier in the process, when, by definition, the necessary diligence to assess the value of potential claims is far less developed. This type of disclosure will necessarily call for speculation regarding the outcome of a legal proceeding before the facts surrounding the claim are developed and before certain critical procedural and substantive matters have been decided. ACC members voiced concern that the proposed disclosures will lead to unreliable estimates and undermine investors' confidence in the entire reporting system. Furthermore, the proposed disclosures will create a substantial risk of waiver of the attorney-client privilege and work-product protection. Another concern is that confidential legal advice and analysis required to be disclosed in public filings will provide a company's adversaries a road map to the company's litigation strategy to the serious disadvantage of the company and its shareholders.

Perhaps most disturbing is that all of these changes are being proposed without evidence that they are either necessary or will help make the disclosure process more meaningful. As noted in our letter, these changes are a solution in search of a problem. FASB's strategy seems to rely on an incorrect assumption that "more disclosure is better" without considering the accuracy and reliability of the disclosures produced.

Editor: How do the proposed changes jeopardize the attorney-client privilege and work product protections?

Petren: The proposed amendments require the disclosure of several categories of information with respect to a litigation-related loss contingency, including a description of the factors likely to affect the ultimate outcome, a qualitative assessment of the most likely outcome for the contingency, and significant assumptions made by the entity in estimating the amounts disclosed. These disclosures will be based on confidential information provided at least in part by the company's in-house lawyers and trial counsel, which may create waiver of attorney-client privilege or attorney work product protection under current common-law precedent. It is also fair to expect that auditors will turn to counsel as the best source of information to test these newly required management disclosures. The sharing of privileged and confidential material with auditors will significantly risk a waiver of privileges as well. The end result is that counsel's formerly confidential evaluation and formulation of judgments about legal matters will be disclosed in a company's financial statements.

Editor: How will the proposed amendments disadvantage companies with respect to their litigation adversaries?

Petren: Under the proposed amendments, a company will be required to reveal key aspects of litigation strategy, such as its qualitative assessment of the most likely outcome and significant assumptions made in estimating the amounts disclosed. These disclosures will certainly signal the company's views of the claim to the plaintiff and are likely to have a number of adverse consequences to the company. For instance, the disclosure itself could constitute admissible evidence in a trial and may also set a floor in settlement negotiations with plaintiffs. The bottom line is that sophisticated plaintiffs' counsel will use, to the disadvantage of a disclosing company and its shareholders, any information contained in the expanded disclosures.

Editor: Wouldn't the provisions for aggregation or exemption from disclosure in certain circumstances lessen the potential negative effects of the proposed amendments?

Petren: While the amendments suggest that categories of cases such as product liability or antitrust cases could be disclosed together, is not clear that aggregate disclosures will protect companies that have "only" one or two major antitrust actions or product liability suits. Further, given that many cases have different fact patterns and/or exposure risks, it is likely that plaintiffs' counsel could isolate and identify anomalies and make educated guesses as to the source and reason for aggregation and reverse engineer assessments of risk on larger or smaller matters. Another purported escape valve is a provision in the proposed rules that would allow a company to omit disclosure of certain loss contingencies if the disclosure of information would be prejudicial to the company's litigation position. The proposed rules make it clear that companies would be allowed to omit disclosures only in "rare instances," even though it is likely that companies would need to invoke this provision quite often to avoid disclosing prejudicial information on a regular basis. Further, in order to rely on this exception, it is presumed that a certain amount of information will have to be offered to justify the exception thereby undermining any benefit that the rule might offer and, at the same time, garnering even more attention from the plaintiff's bar or others who wish to profit from corporate failures.

Editor: Do you expect the proposed amendments to fuel even more litigation?

Petren: Yes, not only will these expanded disclosures compromise the litigation of existing claims, but they could become the grounds for claims of their own. When disclosures - attempting to quantify fundamentally unpredictable outcomes - inevitably prove inaccurate, new claimants will emerge to seize upon the mistaken disclosures as a basis for liability. Litigation is inherently difficult to predict for a variety of reasons. not the least of which is the unpredictability of how juries or judges will view the facts or interpret the law. It is difficult to justify exposing companies to additional liability for incorrectly quantifying a risk at an early stage of litigation with only limited facts on hand. Clearly, the solution to the FASB's perceived inadequacies in disclosure should not be to encourage companies to guess the sky to cover their assets against future suits claiming they underestimated the result.

Editor: Are there other pressing issues on the ACC advocacy agenda?

Petren: ACC is continually evaluating the issues facing the corporate community and focusing on what is really important to Chief Legal Officers and the companies they represent. It is extremely important that we monitor trends, benchmark with our peers, develop our expertise and knowledge, and network with our colleagues to effectively do our jobs. Our leadership is also focused on protecting attorney-client privilege and supporting reforms to create better practice rules - such as MJP reforms or gatekeeper role guidance. ACC is also doing excellent work in helping to equip lawyers to serve their clients in a 21st century business world. ACC is the place where I, and so many other Chief Legal Officers, "sign on" to speak out on the issues that matter for corporate counsel and their clients.

Carol Ann Petren is responsible for CIGNA's legal and public affairs activities. Prior to joining CIGNA in May 2006, Ms. Petren served as senior vice president and deputy general counsel of MCI, responsible for litigation, regulatory matters, government affairs and compliance. Before MCI, Ms. Petren served as deputy general counsel at Sears, Roebuck and Co., following 18 years in litigation defense practice with law firms in Washington, DC. Earlier in her career, she served as a prosecutor in Jackson County, MO., as Assistant U.S. Attorney for the Western District of Missouri and as counsel to the U.S. House of Representatives' Committee on Standards of Official Conduct.

ACC's FAS 5 comments are online at:

www.acc.com/public/ACCcommentFAS5072508.pdf

ACC's FAS 5 homepage also features links to the FAS 5 proposal, letters from other interested groups, and ACC's Top Ten Reason document, all referenced in this article.